Read expert research from CBI Economics on the impact of labour shortages in the long-term – and how policy can tackle current challenges.
What do you get if you mix business interviews, international benchmarking, literature review, and some economic modelling together? As the CBI Economics team found out, you get a fantastic assessment of the challenges within the UK labour market.
We were commissioned by the Recruitment and Employment Confederation (REC) to research the economic impact of skills and labour shortages in the UK, the challenges businesses are facing and how UK policy stacks up with other G7 countries.
You’re probably aware of the current UK challenges on skills and labour shortages – so our research tried to quantify the cost behind labour shortages for your business, and the impact on different economic channels.
Some of the most interesting findings come from how the economy/businesses would react if there was a big increase in demand, in a world where the labour market could not react.
The results are that we’d expect:
- Lower economic growth: as one of the inputs to production remains fixed (labour), the amount we can produce can’t react to higher demand, which leads to higher inflation and lower economic growth
- Higher inflation: businesses increase wages as demand for labour goes up (since it is fixed) but what they produce stays more or less the same, so inflation goes up and in real terms – after taking inflation into account – disposable income falls
- Lower government revenues: weaker economic growth means less taxes collected
- Lower business investment: with businesses spending more on wages, they are forced to invest less and so general business investment falls
- Lower productivity: when labour is constrained, businesses would naturally invest more in capital (machinery, factories, etc.) but when cost pressure mounts, that can become a challenge – making productivity growth much slower.
As part of this research, CBI Economics looked at how two other large economics in the G7 (Canada and Germany) are working on addressing skills and labour shortages. Businesses in Canada are proactively working with education providers and investing in technology and automation. In Germany, the approach has been cross-government collaboration to address low labour market participation to get more people back into the job market looking for work.
Once our modelling and international research were complete, we interviewed 15 businesses on dealing with shortages and finding creative solutions for these challenges. The key points raised were the need for stakeholders to work together – from industry and government to education providers and recruiters – and for the UK to take a longer-term view on skills needs.
The other key point mentioned was that the government has several levers at its disposal to tackle the challenges facing the economy. These include building a workforce for the future (and evolving the Apprenticeship Levy so it can be spent on a variety of accredited and high-quality skills and training), as well as ensuring the immigration system effectively helps address labour shortages for skills not yet available domestically.
At CBI Economics we have a team of dedicated economists with wide ranging experience of evidencing policy recommendations. We can help you calculate the fiscal costs of your policy ideas, demonstrate their economic impact, and even help you to best articulate the issues you face through economic evidence.
